TIDMSFE
RNS Number : 5151T
Safestyle UK PLC
21 March 2019
21 March 2019
Safestyle UK plc
("Safestyle" or the "Group")
Final Results 2018
Safestyle UK plc (AIM: SFE), the leading UK-focused retailer and
manufacturer of PVCu replacement windows and doors for the
homeowner market, today announces its final results for the 12
months ended 31 December 2018.
Financial and operational highlights
Year ended Year ended
31 December 31 December
2018 2017
GBPm GBPm % change
------------ ------------ ----------
Revenue 116.4 158.6 -27%
------------ ------------ ----------
Underlying gross profit(1) 26.7 51.4 -48%
------------ ------------ ----------
Underying gross margin % 22.9% 32.4% -950bps
------------ ------------ ----------
Gross profit 25.9 51.4 -50%
------------ ------------ ----------
Gross margin % 22.2% 32.4% -1,020bps
------------ ------------ ----------
Underlying (loss) / profit
before taxation(2) (8.7) 15.1 -158%
------------ ------------ ----------
Non-underlying items(3) (7.5) (1.3) -501%
------------ ------------ ----------
(Loss) / profit before taxation (16.3) 13.8 -218%
------------ ------------ ----------
EPS - Basic (16.1p) 13.1p -223%
------------ ------------ ----------
Net cash(4) 0.3 11.0 -98%
------------ ------------ ----------
(1) Underlying gross grofit is defined as reported gross profit
before non-underlying items and is included as an alternative
performance measure in order to aid users in understanding the
ongoing performance of the Group.
(2) Underlying (loss) / profit before taxation is defined as
reported (loss) / profit before taxation before non-underlying
items and is included as an alternative performance measure in
order to aid users in understanding the ongoing performance of the
Group.
(3) Non-underlying items consist of non-recurring costs,
share-based payments and the Commercial Agreement amortisation.
(4) Net Cash is cash and cash equivalents less loan
facility.
A reconciliation between the terms used in the above table and
those in the financial statements can be found in the Financial
Review.
-- Challenging 2018 with significant business disruption caused
by an aggressive new market entrant.
-- By year end, following appropriate legal action, the Group
had achieved a substantial recovery in its contracted workforce
across its canvass, sales, surveying and installations operations,
resulting in a significantly improved sales order intake in the
final two months of the year.
-- A detailed three phase turnaround plan was developed in
mid-2018, the first phase of which - stabilising the business - was
completed by October 2018.
-- The implementation of phase two is well underway, which
involves returning the Group to profitability.
-- Volume of frames installed decreased by 30.7% to 184,184 (2017: 265,716).
-- Average unit sales price up 6.2% to GBP646 (2017: GBP608).
-- Conversion of leads into orders improved by 16.1% versus
2017, offsetting to some extent the reduction in total leads caused
by disruption relating to the aggressive competitor.
-- Investment made into improving customer service, compliance
and Health & Safety processes, training and equipment.
-- Digital Transformation project progressed which will increase
efficiency and enhance customer experience.
Outlook
2019 represents a key year for the Group's turnaround and the
Board is confident, despite the broader market backdrop of weaker
consumer confidence, that Safestyle can emerge stronger for the
future.
The momentum generated by an improvement in sales order intake
in the last two months of 2018, following the recovery in the
Group's contracted workforce numbers, has continued into the first
part of 2019. This represents an encouraging start to the year.
Safestyle is well-invested in its manufacturing facilities and
remains focused on implementing phase two of its three phase
turnaround plan to develop a more efficient, professional and
profitable business, whilst retaining as much as possible of what
made the Group successful in the past.
The Board expects the Group to return to profitability in 2019
and to generate positive cashflow. Whilst cognisant of the broader
macro-economic uncertainty, the Board recognises that 2019
represents a year of turnaround as opposed to an immediate return
to the Group's historical levels of financial performance.
Commenting on the results, Mike Gallacher, CEO said:
"The business faced a unique and challenging operating context
in 2018, but I am pleased to say that, through the dedication and
hard work of our people, we ended the year with our business
stabilised and trading position materially improved.
With many of the issues faced in 2018 behind us, our experienced
management team is wholly focused on driving growth, improving
margins and building on the underlying strengths of the business.
We are the UK market leader, with a strong brand, industry leading
production facilities and skilled people across the organisation.
Whilst there is still much work to do, we look forward to the
opportunities of the year ahead and returning Safestyle to
profitability."
Enquiries:
Safestyle UK plc via FTI Consulting
Mike Gallacher, Chief Executive Officer
Rob Neale, Chief Financial Officer
Zeus Capital (Nominated Adviser & Joint Broker) Tel: 0203
Nicholas How / Dominic King 829 5000
Liberum Capital Limited (Joint Broker) Tel: 0203
Neil Patel / Jamie Richards 100 2100
FTI Consulting (Financial PR) Tel: 0203
Alex Beagley / James Styles / Laura Saraby 727 1000
About Safestyle UK plc
The Group is the leading retailer and manufacturer of PVCu
replacement windows and doors to the UK homeowner market. For more
information please visit www.safestyleukplc.co.uk or
www.safestyle-windows.co.uk.
Chairman's Statement - Results Announcement for the year ended
31 December 2018
Summary of performance
2019 represents a key year for our turnaround after 2018 saw an
unprecedented period of disruption and change for Safestyle that
significantly impacted the financial performance of the Group. We
have started 2019 well and are encouraged by our sales order intake
for the first part of the year, which has continued the momentum
achieved in late 2018.
Much of 2018 was severely impacted by the activities of an
aggressive new entrant, NIAMAC Developments Ltd ("NIAMAC") (trading
as SafeGlaze UK), which affected all areas of the Group's
operations and which resulted in the Group taking legal action to
protect itself in May 2018. This event, combined with a backdrop of
a challenging consumer environment, resulted in a severe decline in
our financial performance in the year.
Revenue was down 26.6% to GBP116.4m (2017: GBP158.6m) with
underlying (loss) / profit before taxation(1) a loss of GBP(8.7)m
as compared to a GBP15.1m profit in 2017. Reported (loss) / profit
before taxation was a loss of GBP(16.3)m (2017: profit of
GBP13.8m). Basic EPS for the period was down from 13.1p to
(16.1)p.
There were also significant non-underlying items(2) incurred in
the year of GBP7.5m (2017: GBP1.3m). These consist of costs
principally associated with litigation, restructuring, the
Commercial Agreement (see below) and a fine from the Health and
Safety Executive ("HSE") following prosecution for an incident
which occurred in March 2017.
The Group settled its legal action against NIAMAC in September
2018 and subsequently entered into a Commercial Agreement (see
below) which led to a recovery in the contracted workforce across
our canvass, sales, surveying and installations operations at the
start of November.
Linked to this upturn in workforce, the Group invested
significantly in lead generation, commissions and associated
overheads prior to the end of the year. Whilst this investment is
expected to result in a quicker recovery than would otherwise have
been the case, it occurred too late in the year to improve the
financial performance for 2018. Nonetheless, as I mentioned above,
sales order intake for the final two months of 2018 saw a step
change in performance compared to the majority of the year and I am
pleased to report that the first part of 2019 has continued this
positive momentum, with a performance that is ahead of the
comparative period in 2018.
The Group is now focussed on a rapid return to profitability. A
detailed three phase turnaround plan was developed in the second
half of the year which has clearly-defined projects and milestones
that are designed to stabilise the Group, rebuild sales and
margins, and manage costs effectively. The first phase of the
turnaround, involving the stabilisation of the Group, was
successfully completed in the year. The second phase, which is to
return the Group to profitability and to improve operational
efficiencies, is well underway. The third phase, aimed at
accelerating growth, will begin in 2020.
References
1 - see the Financial Review for definition of underlying (loss)
/ profit before taxation
2 - see the Financial Review for definition and detail of
non-underlying items
Litigation
The Group has invested heavily in building its leading market
position over many years and whilst the Group welcomes healthy
competition in the market, it is committed to protecting its brand,
its reputation, and its staff.
As such, in May 2018, the Group issued a claim seeking
injunctive relief and damages against NIAMAC and a number of named
individuals. The claim was made in the Business and Property Courts
of England & Wales, on the Intellectual Property list.
The claim asked the Court to determine whether Safestyle was
entitled to injunctive relief and damages from what the Group
considered to be passing off, the misuse of confidential
information, unlawful means conspiracy and malicious falsehood.
Safestyle also applied for urgent interim relief, pending the trial
of the matter.
As a result of interim applications to the Court, a series of
injunctions were put in place in May and subsequently in July. On 3
September 2018, the Group announced that it had settled the claim
against all parties with a number of appropriate undertakings made
by NIAMAC to the Court.
Further details of the settlement were kept confidential. NIAMAC
was subsequently placed into administration on 30 October 2018.
The Board is pleased that this matter is closed and the
restoration of the Group to profitability is now our focus.
Commercial Agreement
Shortly after the announcement that the litigation had been
settled, the Group entered into an agreement with Mr M. Misra, who
was a party to the Group's dispute involving NIAMAC.
Whilst the full detail of the agreement is confidential, it
encompasses a five year non-compete agreement and the provision of
services by Mr Misra in support of the continued recovery of
Safestyle. The Group agreed consideration with Mr Misra subject to
the satisfaction of both clear performance conditions by him over
the period to the fourth quarter of 2020 and Safestyle's trading
performance in 2019.
Subject to satisfying the strict terms of the agreement, the
consideration will take the form of an allotment by Safestyle to Mr
Misra of four million ordinary shares of 1 pence each in the
capital of the Group and a payment of cash consideration of between
GBPnil and GBP2.0 million. Both the allotment of shares and payment
of the cash, if any, would only be made in the fourth quarter of
2020.
Balance Sheet and Dividend
As part of phase one of its turnaround plan, the Group secured a
GBP7.5m committed finance facility in October 2018, which will
remain in place to October 2020. This facility is designed to
support the Group's working capital needs in the short term. The
net cash position at the end of the year was GBP0.3m with an
additional GBP3m of the facility remaining unutilised.
To ensure that the Group maintains suitable liquidity for the
immediate future, the Board does not propose a final dividend for
the year (2017: GBPnil). The Board will continue to assess the
possibility of resuming payment of a dividend; this would be linked
to increases in the Group's net cash levels and delivery of the
turnaround plan.
Directorate changes
There have been a number of changes to the Board this year and
the following appointments were made in 2018:
-- Mike Gallacher was appointed as Chief Executive Officer on 1 May 2018.
-- I, Alan Lovell, was appointed as Non-executive Chairman on 16 July 2018.
-- Rob Neale was appointed as Chief Financial Officer on 16 July 2018.
-- Fiona Goldsmith joined the Board as a Non-executive Director
and Chair of the Audit Committee on 17 September 2018.
-- Julia Porter joined the Board as a Non-executive Director on 5 November 2018.
These new appointees joined Chris Davies, a Non-executive
Director who will retire from the Board after the May AGM. I would
sincerely like to thank Chris for his service to the Group since
flotation, particularly during 2018 when the Group and the Board
was going through a challenging period.
These appointments replaced longstanding Executive Directors
Steve Birmingham and Mike Robinson who left the Group in the first
half of the year along with the previous Chairman, Steve Halbert
and Non-executive Director Peter Richardson.
Most recently, on 5 March 2019, Giles Richell, Chief Operating
Officer, resigned from both his Executive role and Board
Directorship. Giles's role will not be replaced and his reporting
lines will revert to the senior leadership team as the Group works
to simplify its organisational structure and recover its overhead
position.
I am pleased with how the new Board is working and I am
confident that the considerable breadth and depth of the Board's
experience will underpin our plans to return Safestyle to
profitability and deliver value to our shareholders.
Looking ahead / outlook
2019 represents a key year for our turnaround from which the
Board and the Executive team are confident, despite the backdrop of
weaker consumer confidence, that we can emerge stronger for the
future.
We reported before the close of 2018 that in the last two months
of the year, following the recovery in our contracted workforce
numbers, the Group achieved an improved sales order intake that was
in line with the comparative period for 2017, signalling a
step-change in the performance seen for the majority of the
year.
As I have previously described, our sales order intake
performance for the first part of 2019 has sustained the momentum
from late 2018; this represents an encouraging start to the
year.
We are well-invested in our manufacturing facilities and are
focussed on implementing our turnaround plan to modernise our
operations and develop a more efficient and professional business,
whilst retaining as much as possible of what made the Group
successful in the past.
Finally and most importantly, in such a year of uncertainty and
adversity, I would sincerely like to thank all our colleagues for
their unparalleled hard work, tenacity and commitment.
A C Lovell
Chairman
21 March 2019
CEO's Statement
Summary
The business faced a unique and challenging operating context in
2018, but I am pleased to say that, through the dedication and hard
work of our people, we ended the year with our business stabilised
and trading position materially improved.
Nonetheless, much of 2018 was spent combating the impact of a
well-funded and aggressive competitor, NIAMAC, trading as SafeGlaze
UK. As previously noted, NIAMAC rapidly took over 30% of our
self-employed agents as well as some key managerial and specialist
staff. Safestyle responded with appropriate legal action and we
reached an early out of court settlement during the third quarter
of our financial year.
By the end of 2018, the business had experienced a significant
recovery in its contracted workforce across its canvass, sales,
surveying and installations operations, resulting in a
significantly improved sales order intake in the final two months
of the year.
2018 has also seen needed advances in our Health, Safety and
Compliance practices and significant progress in our Digital
Transformation initiative, all of which I am confident will support
our leading position in the market in the future.
In summary, our business model remains simple and focussed. We
have a strong and recognised brand, one of the sector's leading
production facilities, along with committed and skilled people
across all areas of the organisation. I would like to thank all our
staff and self-employed agents for their hard work through such an
unusual set of circumstances.
Business review
The NIAMAC issue impacted the business in three ways; the rapid
loss of both key permanent staff and revenue driving self-employed
agents, cost increases associated with retaining staff and agents,
and the cost of litigation and the diversion of management time.
These factors combined led to a fall in turnover of 26.6% to
GBP116.4m (2017: GBP158.6m) and an underlying loss before
taxation(1) of GBP(8.7)m (2017: Profit of GBP15.1m). After 13
consecutive years of market share gains, our market share decreased
to 8.2% (from 10.7% in 2017) reflecting a 28.3% drop in
installations from 59,983 to 42,995. We were able, however, to
increase our average frame sales price by 6.2% to GBP646 and our
average installed order value by 2.7% from GBP3,232 to
GBP3,319.
References
1 - see the Financial Review for definition of underlying (loss)
/ profit before taxation
Turnaround plan
Faced with the challenges outlined above, the business developed
a three phase turnaround plan in mid-2018. The plan has
clearly-defined projects and milestones designed to stabilise the
business in 2018, before returning it to profitability in 2019 and
then accelerating growth in 2020.
The first phase of the turnaround plan was aimed at stabilising
the business through taking immediate legal action to address the
NIAMAC issue, putting in place robust funding to support the
turnaround process and establishing a new Board. After the initial
success in our legal case we then reached an early out of court
settlement, albeit after significant costs were incurred due to the
scale and complexity of the legal action.
Concurrently, new funding was quickly put in place and a series
of highly experienced appointments were made to rebuild the Board
and to bolster the Executive Team. Accordingly, the first phase of
the turnaround plan was completed by October 2018.
As a result, the business is now engaged in the second phase of
the plan through 2019 which is to return the business to
profitability. Our work will be focussed on rebuilding our branches
and organisation, improving margins, addressing costs, recovering
operational KPIs and driving growth. A key element of the plan
includes delivering a step change in our compliance, working
closely with regulatory and industry bodies to strengthen our
processes and controls.
The third phase of the plan will start in 2020, when the
business plans to step up investment in our brand and the Group's
core capabilities, establish new revenue streams and capitalise on
our Digital Transformation.
Health, safety and compliance
Since late 2017, the business has initiated a step change in its
approach to managing Health and Safety with significant investment
in additional resource, new processes, training and equipment. Our
prime focus has been on the most significant risk for our people,
working at height. This followed a working at height incident with
one of our people, earlier in 2017, for which the Group received a
significant fine from the HSE in 2018. The transformation in our
approach has been reinforced by additional audits and management
reporting.
Given the scale and nature of our operations, close management
is needed to monitor compliance with relevant Fair Trading and
Consumer legislation. During 2018, West Yorkshire Trading Standards
("WYTS") took the Group to court over a number of historical
incidents. As a result of this, the new business leadership team
has put in place a comprehensive series of actions while aiming to
establish an effective and collaborative partnership with WYTS.
Good progress has been made on this at the time of writing.
The Board and Executive team will continue to monitor and adapt
our business practices as befits our leading position in the market
and a generally stricter regulatory environment.
Modernisation
I am pleased to report that we made good progress during the
year with our ambitious Digital Transformation project.
At the start of 2018, the first phase of this project,
Electronic Lead Generation, was launched. In August 2018, the
second phase, Electronic Contract, was put in place. Before these
changes, all our self-employed sales representatives carried paper
price lists and entered orders onto forms which were then faxed to
head office every day. They have all now been equipped with a
tablet with a sales process that ensures quick and accurate pricing
and an immediate digital contract submission process.
For our door canvass and sales agents, this represents the
largest single change for Safestyle since flotation and the smooth
implementation of the programme in such challenging circumstances
is one of the major successes in 2018.
This programme has enabled simplification and delivered some
cost savings within the business. Moreover, the new real time sales
data flow gives us a detailed, data-driven understanding of our
sales performance through a rich source of Management Information
which will deliver performance-improving insights in the years
ahead.
During 2019, we will consolidate the implementation of the
system changes we have already made and further expand them into
other parts of the business as we develop our digital
capability.
Outlook
Clearly, as a UK consumer-facing business, we are not alone in
experiencing significant headwinds in 2019. There is of course a
great deal of speculation and some uncertainty about the impact
that Brexit will have on UK consumer confidence, along with the
impact that it may also have on our supply chain and input costs.
The actions and steps taken by the Board to mitigate specific
Brexit risks are described in the Annual Report.
Nonetheless, we are confident in the underlying strength of the
Safestyle business model and we are encouraged that our sales order
intake performance for the first part of 2019 has sustained the
momentum from late 2018. With an experienced Board and Executive
team now in place, our focus is on delivering phase two of our
turnaround plan, preparing the ground for accelerating our growth
and financial performance in 2020.
Turnaround Plan
The business developed a three phase turnaround plan in June
2018. This plan consisted of three phases focussed respectively on:
stabilising the business, returning the business to profitability
and finally, accelerating growth.
Phase one - Stabilising the business: May to October 2018. There
were three key elements of this initial stabilisation phase
delivered during 2018:
Leadership: The Board and Executive team experienced high levels
of turnover in early 2018. Led by Chris Davies (Senior
Non-executive Director), the business moved swiftly to appoint new,
experienced leaders to the Board. Alan Lovell was appointed as
Chairman in July along with the arrival of our new CFO, Rob Neale.
Fiona Goldsmith (Non-executive Director) was appointed in September
and Julia Porter (Non-executive Director) also joined the Board in
November.
The Executive team was strengthened with the appointments of
industry veteran Martin Troughton as Marketing Director (formerly
Marketing Director at Everest Home Improvements and previously
Anglian Home Improvements) and Andrew Parkinson as Sales Director
(formerly Operations Director at Provident Financial Group).
Legal case: Our legal response to the aggressive challenge from
NIAMAC was aimed at protecting our brand, our people and our
business model. Over the previous decade, Safestyle has made
considerable investment in building a nationally recognised brand
and we could not allow consumers to be confused by the SafeGlaze UK
brand name.
In May 2018 we sought immediate injunctive protection and lodged
a series of claims with strong support from major shareholders. Our
claims met with early success, providing protection to the business
and led in due course to a number of court orders being made,
including one requiring NIAMAC to change its SafeGlaze UK brand
name. While we were confident of the expected final outcome of our
court case we were pleased to reach an early out of court
settlement with NIAMAC, allowing the management team to refocus its
efforts with the case successfully concluded and behind us.
Financing: To underpin the next phases of the turnaround plan
and support the Group's working capital needs, a GBP7.5m committed
finance facility was obtained in October 2018, which will remain in
place until October 2020.
Phase two - Return to profitability
With the conclusion of our legal case, funding in place and the
arrival of a new leadership team, the business moved into the
second phase of our turnaround plan. This phase is focussed on
returning the business to profitability. This phase will run
through 2019 and the key elements are:
Rebuilding our staff & self-employed workforce: The business
made progress on rebuilding staff and agent numbers through the
second half of the year and this accelerated in the fourth quarter
with the return of former agents following NIAMAC going into
administration. Integrating large numbers of agents carried some
cost, but supported a clear step up in our sales and installation
volumes as we exited 2018.
Deliver top line growth: Fuelled by the return of a significant
number of agents and strong investment in demand generation, sales
order intake grew to similar levels to those seen in the same six
week period last year. Our plan for 2019 shows an improvement
versus 2018 with a strong recovery in Door Canvass and sustained
growth in Media demand generation. In addition, we will be making
selective above the line investments, using new TV copy which was
aired to support the sales campaign at the start of 2019.
Improving margins: During 2018, margins were negatively impacted
by a number of factors. These include commission costs which rose
due to the competitive landscape, increased digital lead generation
costs and higher overheads due to investment in compliance,
customer service and IT systems. We expect these costs to normalise
and for our margin performance to improve.
Operational effectiveness and cost: The business has experienced
significant cost increases since 2017, shaped by a combination of
costs associated with the disruption caused by NIAMAC and
investment into key areas of the business. Our focus during phase
two of our turnaround plan is to recover large components of the
cost shape we had during 2017. We also aim to make progress on
basic operational metrics such as 'right first time installation,'
fleet and transport costs, frame and door remakes, lead conversion
rates and cancellation rates. All of these have clear plans in
place for improvement during 2019.
Compliance: We operate in an increasingly regulated industry.
This is evident from the 2018 fines relating to historic Health
& Safety and Trading Standards issues. As a direct result we
have now established effective working relationships with WYTS as
we move to put in place the right management processes and
standards. We also continue our focus on the management of our main
Health & Safety risks, with industry-leading practices and
equipment.
Phase three - Accelerate growth
Phase three of our turnaround plan will focus on accelerating
our growth from a base of profitable and sustainable operations.
The key elements of this part of our programme are;
Brand investment: We plan to recharge our brand investment with
stepped-up investment in TV advertising and lead generation. We
will aim to achieve a leading Share of Voice in the industry with
effective TV copy.
Capability development: We will broaden our initial investments
in our staff with the establishment of a Technical Training Academy
and selective investment in management development.
New business: We will be making selective investments in new
growth opportunities, encompassing New Product Development ("NPD")
and geographic expansion, as well as exploring near adjacent
opportunities. Our focus will be on growing our core business and
this will not come at the expense of increasing complexity or
diverting from our strong and simple core business.
Modernisation: As referenced above, the Digital Transformation
of the business will continue with a strong emphasis on harnessing
technology to enable business improvements and deliver cost
savings.
Compliance: We will continue to focus on compliance and
continuously live our values around customer service, integrity and
safety.
Mike Gallacher
Chief Executive Officer
21 March 2019
Financial Review
Financials 2018 2017
----------------
Underlying Non-underlying Total Underlying Non-underlying Total Change
items items in underlying
%
---------------- ---------------
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
---------------- ------------ --------------- --------- ------------ --------------- ---------- ---------------
Revenue 116,426 116,426 158,552 158,552 (26.6%)
------------ --------------- --------- ------------ --------------- ---------- ---------------
Cost of sales (89,748) (801) (90,549) (107,133) (107,133) 16.2%
------------ --------------- --------- ------------ --------------- ---------- ---------------
Gross profit 26,678 (801) 25,877 51,419 51,419 (48.1%)
------------ --------------- --------- ------------ --------------- ---------- ---------------
Other operating
expenses (35,287) (6,717) (42,004) (36,379) (1,251) (37,630) 3.0%
------------ --------------- --------- ------------ --------------- ---------- ---------------
Operating
(loss)
/ profit (8,609) (7,518) (16,127) 15,040 (1,251) 13,789 (157.2%)
------------ --------------- --------- ------------ --------------- ---------- ---------------
Finance income 7 7 35 35 (80.0%)
------------ --------------- --------- ------------ --------------- ---------- ---------------
Finance costs (142) (142) (10) (10) (1,320.0%)
------------ --------------- --------- ------------ --------------- ---------- ---------------
(Loss) / profit
before
taxation (8,744) (7,518) (16,262) 15,065 (1,251) 13,814 (158.0%)
------------ --------------- --------- ------------ --------------- ---------- ---------------
Taxation 2,964 (2,986)
------------ --------------- --------- ------------ --------------- ---------- ---------------
(Loss) / profit
for the year (13,298) 10,828
------------ --------------- --------- ------------ --------------- ---------- ---------------
Basic EPS
(pence
per share) (16.1)p 13.1p
------------ --------------- --------- ------------ --------------- ---------- ---------------
Diluted EPS
(pence
per share) (16.1)p 13.0p
------------ --------------- --------- ------------ --------------- ---------- ---------------
Cash and cash
equivalents 4,163 10,975
------------ --------------- --------- ------------ --------------- ---------- ---------------
Loan facility (3,903) -
------------ --------------- --------- ------------ --------------- ---------- ---------------
Net cash(1) 260 10,975
------------ --------------- --------- ------------ --------------- ---------- ---------------
KPIs 2018 2017 Change
%
Average Order Value
(GBP inc VAT) 3,319 3,232 2.7%
-------- -------- --------
Average Frame Price
(GBP ex VAT) 646 608 6.2%
-------- -------- --------
Frames installed
- units 184,184 265,716 (30.7%)
-------- -------- --------
Orders installed 42,995 59,983 (28.3%)
-------- -------- --------
Frames per order 4.28 4.43 (3.3%)
-------- -------- --------
Financial and KPI headlines
-- Frames installed declined by 30.7% to 184,184 units with a
similar decline of 28.3% for orders installed to 42,995.
-- Average frame price improved by 6.2% to GBP646 as a result of
price actions and a larger mix of higher average priced composite
guard doors.
-- Revenue decreased by 26.6% to GBP116.4m, largely as a result
of the significant decline in installation volumes for the majority
of the year linked to the NIAMAC disruption.
-- Underlying gross profit(2) declined by 48.1% to GBP26.7m with
the decline in revenue described above further compounded by higher
commission costs, an increase in lead generation investment
(specifically in digital media), a growth in installation-related
materials and access solutions equipment and finally, higher
(mix-driven) consumer finance subsidies. Reported Gross Profit
declined by 49.7% to GBP25.9m.
-- Underlying other operating expenses(3) reduced by 3% to
GBP35.3m with reductions in TV advertising offset by increased
Factory and IT capital investment-driven depreciation, an increase
in costs linked to rebuilding the Board and management team, and
investment in compliance, customer service and IT systems and
infrastructure costs.
-- Reported other operating expenses increased by 11.6% to
GBP42.0m with the increase largely attributable to GBP7.0m of
non-recurring costs in 2018 (see note 4 for full breakdown).
-- Finance costs include costs of the borrowing facilities from November 2018.
-- Underlying (loss) / profit before taxation(4) was a loss of
GBP(8.7)m for the year (2017: profit of GBP15.1m).
-- Non-underlying items were GBP7.5m in the year, full details
of which are provided on the following pages of this Financial
Review.
-- Reported (loss) / profit before taxation was a loss of
GBP(16.3)m (2017: profit of GBP13.8m) which is attributable to the
decline in gross profit due to the trading performance in the year,
coupled with a GBP7.0m increase in non-recurring costs versus
2017.
-- Net cash(1) was GBP0.3m versus the prior year position of GBP11.0m.
References
1 Net cash is cash and cash equivalents less loan facility
2 Underlying gross profit is defined in the 'Underlying
performance measures' section below and the reconciliation between
this measure and the GAAP measure is shown in the 'Financials'
table at the front of this Financial Review
3 Underlying other operating expenses are defined in the
'Underlying performance measures' section below and the
reconciliation between this measure and the GAAP measure is shown
in the 'Financials' table at the front of this Financial Review
4 Underlying (loss) / profit before taxation is defined in the
'Underlying performance measures' section below and the
reconciliation between this measure and the GAAP measure is shown
in the 'Financials' table at the front of this Financial Review
Underlying performance measures
As described in the Chairman's Statement, the Group has faced an
unprecedented series of events. These events have given rise to a
number of significant non-underlying items in the year.
Consequently, adjusted measures of underlying gross profit,
underlying other operating expenses and underlying (loss) / profit
before taxation have been presented as the primary measures of
financial performance. Adoption of these measures means that
non-underlying items are excluded to enable a meaningful evaluation
of the performance of the Group from year to year.
Non-underlying items consist of non-recurring costs, share-based
payments and Commercial Agreement amortisation. A full breakdown of
these items with details are shown below. Non-recurring costs are
excluded because they are not expected to repeat in future years.
These costs are therefore not included in the Group's primary
performance measures as they would distort how the performance and
progress of the Group is assessed and evaluated.
Share-based payments are subject to volatility and fluctuation
and are excluded from the primary performance measures as such
changes year to year would again potentially distort the evaluation
of the Group's performance year to year.
Finally, Commercial Agreement amortisation is also excluded from
the primary performance measures because the Board believes that
exclusion of this enables a better evaluation of the Group's
underlying performance year to year.
These alternative measures are entirely consistent with how the
Board monitors the financial performance of the Group.
Revenue
Revenue for the period was GBP116.4m compared to GBP158.6m last
year, representing a decline of 26.6%. The key performance drivers
were as follows:
-- Leads generated from direct response media increased by 2.8%.
However, leads from other sources, particularly canvass which was
significantly disrupted by the NIAMAC issues during the year,
declined by 60% for the full year.
-- Significantly, in the last two months of the year, following
the recovery of the workforce described in the Chairman's
Statement, the Group experienced a marked improvement in lead
generation with total leads only 3.9% lower than the same period
last year.
-- Conversion of leads into orders improved by 16.1% versus
2017, which was driven by the increased mix of digital media leads
that convert at an improved rate compared to other lead sources.
This improvement in conversion went some way to offsetting the
reduction in total leads described above.
-- For the full year, there was a 28.3% decline in the volume of
orders installed from 59,983 to 42,995 which was largely driven by
the decline in our workforce due to the NIAMAC disruption.
-- A reduction in the number of frames installed also occurred,
predominantly for the same reason as above, with a 30.7% decline
from 265,716 to 184,184 frames, resulting in a slight reduction in
number of frames installed per order of 3.3% to 4.28.
-- The average order value including VAT increased by 2.7% to
GBP3,319 and the average frame price increased by 6.2% from GBP608
to GBP646. Some price increases were implemented during the year.
Whilst the Group remains focussed on maintaining a competitive
price point, the price increases were required to negate margin
pressures in a number of areas along with the impact of Sterling
weakness and commodity and silicone inflation. These price changes,
together with an increased share of higher value composite doors
and coloured frames, resulted in the overall average price increase
observed.
-- This favourable average price impact was partially offset by
an increase in uptake of our consumer finance products, the impact
of which is deducted from revenue.
Underlying gross profit
Underlying gross profit reduced by 48.1% in the period to
GBP26.7m (2017: GBP51.4m). Underlying gross margin percentage
reduced to 22.9% (2017: 32.4%).
GBP11.7m of the reduction in underlying gross profit is
attributable to the decline in installation volumes described
above. The other main drivers of the lower gross profit and diluted
gross margin percentage are as follows:
-- There has been an increased utilisation of traditional
scaffolding solutions to ensure our teams are working safely at
height.
-- The change of mix generated via direct response media drove
an adverse cost per order effect despite an improved lead to order
conversion rate. The mix effect was compounded in FY18 by a
significant year on year increase in 'Pay Per Click' rates which
were driven by increased online competition. The increase in
digital media costs was partially offset by savings in TV
advertising investment which is included within underlying
operating expenses.
-- Agent commission costs as a percentage of sales increased in
the year. The single largest driver was the business responding to
the more competitive recruitment environment. In the last two
months of the year, following the recovery of the workforce, this
effect was amplified by investing in lead generation and installer
training ahead of the installation activity occurring.
Underlying other operating expenses
Underlying other operating expenses decreased by 3% versus 2017.
There were reductions in the amount invested in TV advertising,
which partially offset the higher investment in digital media
referred to above. There were increases in other overhead areas as
follows:
-- Depreciation increased due to factory and IT capital investment in the last 2 years.
-- Salary and related costs increased despite cost reductions in
some operational areas as a result of the Digital Transformation
project. These savings have been offset by investment in Health
& Safety, Customer Service, HR and Installation workforce
management as well as costs associated with the rebuild of the
Board and Executive team. A key component of the turnaround plan is
for the Group to simplify its organisational structure and recover
its overhead position during 2019.
-- IT licensing and infrastructure costs also increased in the year as a result of the Digital Transformation project, the rollout of technology across the branch network and the implementation of improved network security and resilience.
Underlying (loss) / profit before taxation
Underlying (loss) / profit before taxation was a loss of
GBP(8.7)m in the period (2017: a profit of GBP15.1m). This is
before the non-underlying items described below.
Non-underlying items
A total of GBP7.5m has been separately treated as non-underlying
items for the year (2017: GBP1.3m). These consist of GBP7.8m of
non-recurring costs, a GBP0.4m shared based payment credit and
GBP0.1m of Commercial Agreement (Intangible Asset) amortisation.
The following table provides the full breakdown:
Non-underlying Items 2018 2017
--------------------------------------
GBP000 GBP000
-------------------------------------- --------------- ---------------
Product guarantees provision 801 -
--------------- ---------------
Non-recurring costs charged to cost
of sales (note 4) 801 -
--------------- ---------------
Litigation costs 1,912 -
--------------- ---------------
Restructuring and operational costs 1,167 830
--------------- ---------------
Fines 1,079 -
--------------- ---------------
Onerous leases 294 -
--------------- ---------------
Commercial Agreement costs 311 -
--------------- ---------------
Commercial Agreement service fee 1,000
--------------- ---------------
Non-recurring pay awards 635 -
--------------- ---------------
Dilapidations provision 618 -
--------------- ---------------
Non-recurring costs charged to other
operating expenses (note 4) 7,016 830
--------------- ---------------
Total non-recurring costs (note 4) 7,817 830
--------------- ---------------
Equity-settled share based payment
(credit) / charges (note 11) (374) 421
--------------- ---------------
Commercial Agreement amortisation
(note 8) 75 -
--------------- ---------------
Total non-underlying items 7,518 1,251
--------------- ---------------
The single largest non-recurring item is GBP1.9m of costs
related to the NIAMAC litigation in the year as described in the
Chairman's statement. This matter is now closed and there will be
no continuation of these costs into 2019.
Included within the 'Fines' category is a fine from the HSE of
GBP0.9m following prosecution for a working at height accident in
March 2017. Since early 2017, the Group has taken significant steps
to avoid a reoccurrence. These measures include an increased use of
scaffolding, investment in other market-leading solutions for
working safely at height, establishing a new Group Health and
Safety Function managed by an experienced manager and significantly
increasing safety audits alongside numerous other process
improvements.
The remaining GBP0.2m within the 'Fines' category relates to a
fine for 13 infringements brought by WYTS across a period of 2 1/2
years between 2015 and early 2017. As a business, we view the
conduct and behaviour of our representatives of the utmost
importance and we are now pro-actively working in partnership with
WYTS to ensure compliance with customer standards across the
business.
The Commercial Agreement service fee is the assessed fair value
of the consideration payable under the terms of the Commercial
Agreement that has been attributed to services received in the
year.
As part of a review by management of provisions made for the
Group's future obligations, a revision to the estimates used for
future product guarantee claims and the creation of a dilapidations
provision has been made which management consider more accurately
reflect the Group's obligations in these two areas. The full impact
of this change in estimate has been recorded in the Consolidated
Income Statement for the current year. However, included in
non-recurring costs is the impact on the prior year had this change
in estimate been retrospectively applied being GBP0.8m in relation
to the change in product guarantee provision estimate (recognised
in cost of sales) and GBP0.6m in relation to the dilapidation
provision change in estimate (recognised in other operating
expenses). Both of these amounts have been excluded from underlying
results as management believes recording the full charge in 2018
distorts assessment of the underlying performance for the year.
Further detail of all non-recurring costs is contained in note
4.
Finally, in addition to the items classified as non-recurring
costs on the Consolidated Income Statement, the share based payment
(credit) / charge and the amortisation of the intangible asset
created as a result of the Commercial Agreement have been excluded
from the underlying (loss) / profit before taxation performance
measure to enable a meaningful evaluation of the performance of the
Group from year to year.
Earnings per share
Basic earnings per share for the period were a loss of (16.1)p
compared to 13.1p profit for the prior year. The basis for these
calculations is detailed in note 6.
Net cash(1) and cashflow
As part of phase one of its turnaround plan, the Group secured a
GBP7.5m committed finance facility in October 2018, which will
remain in place to October 2020. This facility is designed to
support the business and underpin the turnaround of the Group. The
structure of the facility is that of a GBP4.5m term loan, which was
drawn on completion of the deal and a GBP3m revolving credit
facility that can be utilised as required over the next two years
to support any ongoing working capital needs.
At the year-end, cash and cash equivalents were GBP4.2m (2017:
GBP11.0m). After deducting the loan facility of GBP3.9m, which is
stated net of arrangement fees, net cash(1) of the Group was
GBP0.3m at the end of the year (2017: GBP11.0m).
Net cash (outflow) / inflow from operating activities, including
the cashflow impact of non-underlying items, was an outflow of
GBP(8.8)m (2017: inflow of GBP11.7m).
Capital expenditure in the year on property, plant and equipment
and software was GBP1.9m, a considerable reduction on the GBP4.7m
spend in 2017 which included GBP2.4m related to the factory
expansion. Investment in the Digital Transformation project in the
year represented the largest component of capital investment in the
period.
No dividends were paid in 2018 (2017: GBP9.3m) which, combined
with the movements above, resulted in a net cash outflow in the
year of GBP(6.8)m (2017: outflow of GBP(2.5)m).
References
1 Net cash is cash and cash equivalents less loan facility
Dividends
The Board is not proposing a final dividend for this year (2017:
GBPnil per share).
R Neale
Chief Financial Officer
21 March 2019
Consolidated income statement for the year ended 31 December
2018
2018 2017
Note GBP000 GBP000
Revenue 116,426 158,552
Cost of sales (90,549) (107,133)
Gross profit(1) 25,877 51,419
Other operating expenses(2) (42,004) (37,630)
Operating (loss) / profit(3) (16,127) 13,789
Finance income 7 35
Finance costs (142) (10)
Net finance costs (135) 25
(Loss) / profit before tax (16,262) 13,814
Underlying (loss) / profit before tax before non-recurring costs, Commercial
Agreement amortisation
and share based payments (8,744) 15,065
Non-recurring costs 4 (7,817) (830)
Commercial Agreement amortisation 8 (75) -
Share based payments 11 374 (421)
(Loss) / profit before tax (16,262) 13,814
---------------------------------------------------------------------------------- ------ --------- ----------
Taxation 7 2,964 (2,986)
(Loss) / profit for the year (13,298) 10,828
========= ==========
Basic EPS (pence per share) 6 (16.1p) 13.1p
Diluted EPS (pence per share) 6 (16.1p) 13.0p
(1) Gross profit includes GBP801k of non-recurring costs. Adjusting for this gives underlying
gross profit of GBP26,678k. See Financial Review for details
(2) Other operating expenses includes GBP7,016k of non-recurring costs. Adjusting for these
gives underlying other operating expenses of GBP35,287k. See Financial Review for details
(3) Operating loss includes GBP7,817k of non-recurring items, GBP374k of share based payments
credit and GBP75k of Commercial Agreement amortisation. Adjusting for these gives an underlying
operating loss of GBP8,609k. See Financial Review for details
Consolidated statement of financial position as at 31 December
2018
2018 2017
Note GBP000 GBP000
Assets
Intangible assets - Trademarks 8 504 504
Intangible assets - Goodwill 8 20,758 20,758
Intangible assets - Software 8 1,346 786
Intangible assets - Other 8 2,188 -
Property, plant and equipment 14,213 14,975
Deferred taxation asset 693 28
Non-current assets 39,702 37,051
-------------------- --------------------
Inventories 2,416 2,032
Current taxation asset 2,287 -
Trade and other receivables 4,478 4,559
Cash and cash equivalents 4,163 10,975
Current assets 13,344 17,566
-------------------- --------------------
Total assets 53,046 54,617
==================== ====================
Equity
Called up share capital 10 828 828
Share premium account 81,845 81,845
Profit and loss account 13,347 24,712
Common control transaction reserve (66,527) (66,527)
Total equity 29,493 40,858
-------------------- --------------------
Liabilities
Trade and other payables 15,286 10,864
Corporation taxation liabilities - 776
Deferred taxation liability 53 90
Provision for liabilities and charges 9 1,123 599
Current liabilities 16,462 12,329
-------------------- --------------------
Provision for liabilities and charges 9 3,188 1,430
Borrowing facility 3,903 -
Non-current liabilities 7,091 1,430
-------------------- --------------------
Total liabilities 23,553 13,759
==================== ====================
Total equity and liabilities 53,046 54,617
==================== ====================
Consolidated statement of changes in equity for the year ended
31 December 2018
Share Share Profit Common Total
capital premium and loss control equity
account transaction
reserve
GBP000 GBP000 GBP000 GBP000 GBP000
Balance at 1
January 2017 828 81,979 22,052 (66,527) 38,332
Total
comprehensive
income for the
year - - 10,828 - 10,828
Transactions
with owners
recorded
directly in
equity:
Issue of shares 2 256 - - 258
Buy back of
shares (2) (390) - - (392)
Equity settled
share based
payment
transactions
(see note 11) - - 421 - 421
Corporation
taxation relief
taken
to reserves - - 747 - 747
Dividends - - (9,336) - (9,336)
-------------------- -------------------- -------------------- -------------------- ---------
Balance at 31
December 2017 828 81,845 24,712 (66,527) 40,858
Total
comprehensive
(loss) for the
year - - (13,298) - (13,298)
Transactions
with owners
recorded
directly in
equity:
Equity settled
share based
payment
transactions
(see note 11) - - (374) - (374)
Deferred
taxation asset
taken to
reserves - - 44 - 44
Equity settled
Commercial
Agreement
(see note 8) - - 2,263 - 2,263
Balance at 31
December 2018 828 81,845 13,347 (66,527) 29,493
-------------------- -------------------- -------------------- -------------------- ---------
Consolidated statement of cash flows for the year ended 31
December 2018
2018 2017
GBP000 GBP000
Cash flows from operating activities
(Loss) / profit for the year (13,298) 10,828
Adjustments for:
Depreciation of plant, property and equipment 1,715 1,489
Amortisation of intangible fixed assets 400 241
Finance income (7) (35)
Finance expense 142 10
Loss on sale of plant, property and equipment 42 -
Equity settled share based payments (credit) / charge (374) 421
Taxation (credit) / expense (2,964) 2,986
---------------------- ----------------------
(14,344) 15,940
(Increase) / decrease in inventories (384) 144
Decrease in trade and other receivables 81 1
Increase / (decrease) in trade and other payables 4,422 (1,120)
Increase / (decrease) in provisions 2,282 (367)
---------------------- ----------------------
6,401 (1,342)
Hire purchase interest paid - (10)
Other interest paid (142) -
---------------------- ----------------------
(142) (10)
Taxation paid (757) (2,880)
Net cash (outflow) / inflow from operating activities (8,842) 11,708
---------------------- ----------------------
Cash flows from investing activities
Acquisition of property, plant and equipment (1,028) (4,075)
Acquisition of subsidiary (30) -
Interest received 7 35
Proceeds from sale of property, plant and equipment 33 -
Acquisition of intangible fixed assets (855) (612)
Net cash outflow from investing activities (1,873) (4,652)
Cash flows from financing activities
Proceeds from loans and borrowings 3,903 -
Proceeds from the issue of ordinary shares - 258
Purchase and cancellation of ordinary shares - (392)
Payment of hire purchase and finance leases - (70)
Dividends paid - (9,336)
Net cash inflow / (outflow) from financing activities 3,903 (9,540)
Net (decrease) in cash and cash equivalents (6,812) (2,484)
Cash and cash equivalents at start of year 10,975 13,459
Cash and cash equivalents at end of year 4,163 10,975
====================== ======================
Notes to the financial statements
1 Statement of compliance
Whilst the financial information included in this Preliminary
Announcement has been prepared on the basis of the requirements of
International Financial Reporting Standards (IFRSs) in issue, as
adopted by the European Union, this announcement does not itself
contain sufficient information to comply with IFRS.
The Group expects to publish full Consolidated Financial
Statements in March 2019. The financial information set out in this
Preliminary Announcement does not constitute the Group's
Consolidated Financial Statements for the years ended 31 December
2018 or 2017, but is derived from those Financial Statements.
Statutory Financial Statements for 2018 will be delivered to the
registrar of companies with the Jersey Financial Services
Commission (JFSC), following the Group's Annual General Meeting.
The auditor, KPMG LLP, has reported on the 2018 Financial
Statements. Their report was unqualified, did not include a
reference to any matters to which the auditors drew attention by
way of emphasis without qualifying their report and did not contain
statements under Section 113B (3) or (6) of the Companies (Jersey)
Law 1991.
Safestyle UK plc is a public listed group incorporated in
Jersey. The Group's shares are traded on AIM. The Group is required
under AIM rule 19 to provide shareholders with audited consolidated
financial statements. The registered office address of the
Safestyle UK plc is 47 Esplanade, St Helier, Jersey JE1 0BD.
The Group is not required to present parent company
information.
Basis of preparation
The Group's financial statements for the year ended 31 December
2018 ("financial statements") have been prepared on a going concern
basis under the historical cost convention and are in accordance
with International Financial Reporting Standards (IFRSs) as adopted
by the EU and the International Financial Reporting Standards
Interpretations Committee interpretations issued by the
International Accounting Standards Board ("IASB") that are
effective or issued and early adopted as at the time of preparing
these financial statements.
Safestyle UK plc was incorporated on 8 November 2013. On 3
December 2013 Safestyle UK plc acquired Style Group Holdings
through a share for share exchange. This was accounted for as a
common control transaction. The result of this is that the
financial statements of Style Group Holdings have been included in
the Group consolidated financial statement of Safestyle UK plc at
their book value at the IFRS transition date of 1 January 2010 with
the assumption that the Group was in existence for all the periods
presented. The excess of the cost at the time of acquisition over
its book value has been recorded as a common control transaction
reserve.
The accounting policies set out below have unless otherwise
stated, been applied consistently to all periods presented in these
financial statements.
The preparation of financial statements requires Management to
exercise its judgement in the process of applying accounting
policies. The areas involving a higher degree of judgement or
complexity, or areas where assumptions and estimates are
significant to these financial statements are disclosed in note
3.
(a) New and amended standards adopted by the Group.
The Group has adopted the following new standards and amendments
for the first time. Unless otherwise stated, they have not had a
material impact on the financial statements.
-- IFRS 9 Financial Instruments (effective 1 January 2018)
-- IFRS 15 Revenue from Contracts with Customers (effective 1 January 2018)
(b) New standards, amendments and interpretations issued but not
effective and not early adopted.
At the date of approval of these financial statements, the
following standards, amendments and interpretations which have not
been applied in these financial statements were in issue but not
yet effective (and in some cases have not yet been adopted by the
EU):
-- IFRS 16 Leases (effective 1 January 2019)
-- IFRIC 23 Uncertainty over Income Taxation Treatments (effective 1 January 2019)
-- Amendments to IFRS 9 Financial Instruments (effective 1 January 2019)
-- Annual Improvements to IFRSs - 2015-2017 Cycle (effective 1 January 2019)
Basis of consolidation
Subsidiaries are entities that the company has power over,
exposure or rights to variable returns and an ability to use its
power to affect those returns. In assessing control, potential
voting rights that are currently exercisable or convertible are
taken into account. The financial statements of subsidiaries are
included in the consolidated financial statements from the date
that control commences until the date control ceases.
Intragroup transactions and balances are eliminated on
consolidation.
Going concern
The financial statements are prepared on a going concern basis
which the Directors believe to be appropriate for the following
reasons.
The Group made a statutory loss of GBP13.3m in the year to 31
December 2018 (FY17: GBP10.8m profit). The Group entered into a two
year financing arrangement on 26 October 2018 for GBP7.5m. The
finance facility includes certain covenants, including a minimum
EBITDA to be tested on a cumulative monthly basis. As at 31
December 2018, GBP4.5m term loan was fully drawn on the facility
and in the period to 13 March 2019, GBP2.5m of the revolving credit
facility has also been drawn. The Group had net debt of GBP2.5m at
the end of February 2019. This increase in net debt since the
year-end was expected with the first quarter representing the peak
period for lead generation investment.
The Directors have prepared forecasts covering the period to
December 2020, built from the detailed Board approved budget for
2019. The 2019 Budget includes a number of assumptions in relation
to sales volume growth and margin improvements. The Directors have
considered reasonably possible downside sensitivity scenarios
including a 10% reduction in sales and no margin growth in 2019,
offset by mitigating actions within the control of management
including reductions in areas of discretionary spend.
As part of this assessment the Directors have considered the
potential impact from Brexit on the forecasts namely in terms of
supply chain availability and pricing and the impact on the wider
economy, potentially impacting sales of the Group's product.
These forecasts, including the reasonably possible downside
scenarios with mitigating actions, show that the Group will
continue to operate with sufficient headroom within the revised
facility terms in place for the duration of the facility agreement
(expires October 2020).
Based on the above, whilst recognising the challenges in the
turnaround plan, the directors have reasonable expectation that the
Group and company has adequate resources to continue in operational
existence for the foreseeable future and therefore continue to
adopt the going concern basis of accounting in preparing the annual
financial statements.
Cautionary Statement
This Report contains certain forward looking statements with
respect to the financial condition, results, operations and
business of Safestyle UK plc. These statements and forecasts
involve risk and uncertainty because they relate to events and
depend upon circumstances that will occur in the future. There are
a number of factors that could cause actual results or developments
to differ materially from those expressed or implied by these
forward looking statements and forecasts. Nothing in this Report
should be construed as a profit forecast.
2 Summary of significant accounting policies
Non-recurring costs
Items that are either material because of their nature,
non-recurring or whose significance is sufficient to warrant
separate disclosure and identification within the consolidated
financial statements are referred to as non-recurring items. The
separate reporting of non-recurring items is important to provide
an understanding of the Group's underlying performance.
Revenue recognition
Revenue is recognised at the fair value of the consideration
received or receivable for the sale of goods and services in the
ordinary course of business and is shown net of Value Added
Taxation. The Group primarily earns revenues from the sale, design,
manufacture and installation of domestic double-glazed replacement
windows and doors. Product sales revenues are recognised once the
goods have been installed. Survey fees are recognised at the point
at which they become non-refundable. The Group received no
commissions for introducing finance products to customers in 2018,
only paying subsidies which are recognised as a reduction to
revenue. Revenue from maintenance is recognised on completion of
the work carried out.
3 Accounting estimates and judgements
In preparing these financial statements, management has made
estimates that affect the application of the Group's accounting
policies and the reported amounts of assets, liabilities, income
and expenses. Actual results can differ from these estimates.
Estimates and underlying assumptions are reviewed on an ongoing
basis. Revisions to estimates are recognised prospectively.
Judgements
Information about judgements made in applying accounting
policies that have the most significant effects on the amount
recognised include the following notes:
Note 8 Intangible assets; judgement about the substance and
accounting for the Commercial Agreement.
Note 9 Provisions for liabilities and charges; judgement about
the substance and accounting for the Commercial Agreement.
Assumptions and estimation uncertainties
Information about assumptions and estimation uncertainties at 31
December 2018 that have a significant risk of resulting in a
material adjustment to the carrying amounts of assets and
liabilities in the next financial year is included in the following
notes:
Note 9 Recognition and measurement of provisions; key
assumptions about the likelihood and magnitude of an outflow of
resources in relation to the Commercial Agreement.
The assessment of whether trade receivables are recoverable is
subject to estimation uncertainty. An allowance for impairment is
made for estimated irrecoverable amounts.
Other sources of estimation uncertainties
Product guarantees provisions
The Group gives guarantees against all its products, which in
the majority of cases covers a period of 10 years. The level of
provision required to cover the expected future costs of rectifying
faults and the future rate of product failure arising within the
guarantee period is subject to estimation uncertainty. Further
details can be found in note 9.
Dilapidations provisions
The Group has a number of operating leases in relation to
properties, where there is a contractual obligation to undertake
remedial works at the end of the lease term. The level of provision
required to cover the expected future costs of dilapidations is
subject to estimation uncertainty around expected costs and
management intention. Further details can be found in note 9.
4 Non-recurring costs
2018 2017
GBP000 GBP000 Note
Product guarantee provision 801 - a
Non-recurring items charged to cost of sales 801 -
Litigation Costs 1,912 - b
Restructuring and operational costs 1,167 830 c
Fines 1,079 - d
Onerous Leases 294 - e
Commercial Agreement costs 311 - f
Commercial Agreement service fee 1,000 - g
Non-recurring pay awards 635 - h
Dilapidations provision 618 - i
Non-recurring items charged to other operating expenses 7,016 830
Total non-recurring items 7,817 830
================== ==================
a) As part of a review by management of provisions made for the
Group's future obligations, a revision to the estimates used for
future product guarantee claims has been made which management
consider more accurately reflects the Group's obligations. Included
in non-recurring costs is the impact on the prior year had this
change in estimate been retrospectively applied.
b) Litigation costs are expenses incurred as a result of the
NIAMAC litigation referred to in the Chairman's Statement. These
costs are predominantly legal advisor's fees.
c) Restructuring and operational costs are expenses incurred,
including redundancy payments, as a result of changes being made to
reduce the cost structure of the business.
d) Fines relate to the HSE and WYTS fines described in the
Financial Review and related legal representation fees.
e) Onerous leases represent an accrual for all rental costs up
until the first lease break date for properties that were closed in
the year.
f) Commercial Agreement costs are expenses incurred in securing
the Commercial Agreement referred to in the Chairman's Statement.
These costs consist of legal advisor fees and a set of one-off
payments made as part of the contractual terms of the final
agreement.
g) Commercial Agreement service fee is the assessed fair value
of the consideration payable under the terms of the Commercial
Agreement that has been attributed to services received in the
year.
h) Non-recurring pay awards relate to the bonus payments made to
executives as described in the Statement from the Chairman of the
Remuneration Committee in the Annual Report. These have been
classified as non-recurring as they were paid to reflect the
supplementary duties undertaken in a period of significant
disruption and reward delivery of key actions required to secure
and stabilise the business and are not linked to profit
performance. These payments were only awarded due to the
unprecedented events the Group experienced in 2018 and will not be
made again.
i) The accounting policy for providing for exit obligations on
leased property, principally dilapidations, has also been assessed
in the year. In previous years, no provision has been made for
these. Management have now concluded that a provision is
appropriate based on new circumstances during the year, a strategic
review by management, the existence of an obligation and the
ability to reliably estimate it. Were a provision to have been
applied in prior years, the cumulative charge to the end of 2017
would have been GBP618k.
5 Dividends
The aggregate amount of dividends
paid comprises: 2018 2017
GBP000 GBP000
2016 Final dividend paid of GBP0.075
(2015: GBP0.075) per ordinary share - 6,224
2017 Interim dividend paid of GBP0.0375
(2016: GBP0.0375) per ordinary share - 3,112
---- -------
- 9,336
================================================== =======
No final dividend in relation to 2017 was declared and no
dividends were declared in 2018.
6 Earnings per share
2018 2017
Basic earnings per ordinary share
(pence) (16.1) 13.1
Diluted earnings per ordinary share
(pence)* (16.1) 13.0
a) Basic earnings per
share
The calculation of basic earnings per share has been based on the
following profit attributable to ordinary shareholders and weighted-average
number of shares outstanding.
i) (Loss) / profit attributable
to ordinary
shareholders (basic)
2018 2017
GBP000 GBP000
(Loss) / profit attributable to
ordinary shareholders (13,298) 10,828
=========================== ==============
ii) Weighted-average
number of ordinary
shares (basic)
No. of shares No. of shares
'000 '000
In issue during the year 82,809 82,883
=========================== ==============
b) Diluted earnings per share
*Due to net loss for the period, dilutive loss per share is the
same as basic.
The calculation of diluted earnings per share has been based on
the following profit attributable to ordinary shareholders and
weighted-average number of ordinary shares outstanding after adjustment
for the effects of all dilutive potential ordinary shares.
i) (Loss) / profit attributable to
ordinary
shareholders (diluted)
2018 2017
GBP000 GBP000
(Loss) / profit attributable to
ordinary shareholders (13,298) 10,828
=========================== ==============
ii) Weighted-average
number of ordinary
shares (diluted)
No. of shares No. of shares
'000 '000
Weighted-average number of
ordinary
shares (basic) 82,809 82,883
Effect of conversion of share options
and share consideration 2,270 396
85,079 83,279
=========================== ==============
The average market value of the Group's shares for the purpose
of calculating the dilutive effect of share options was based on
quoted market prices for the period during which the options were
outstanding.
7 Taxation
2018 2017
GBP000 GBP000
Recognised in the Consolidated Income
Statement
Current taxation
Current taxation on income for
the period (2,461) 2,805
Adjustments in respect of prior 155 -
periods
Total current taxation (2,306) 2,805
------------- -------
Deferred taxation
Origination and reversal of timing
differences (658) 180
Effect of change in taxation rate - (11)
Adjustments in respect of prior
periods - 12
Total deferred taxation (658) 181
------------- -------
Total taxation (credit)/ expense (2,964) 2,986
------------- -------
Reconciliation of effective taxation
rate
2018 2017
Current taxation reconciliation GBP000 GBP000
(Loss) / profit for the year (13,298) 10,828
Total taxation (credit) / expense (2,964) 2,986
(Loss) / profit excluding taxation (16,262) 13,814
------------- -------
Expected taxation (credit) / charge
based on the standard rate of
corporation taxation in the UK
of 19.00% (2017: 19.25%) (3,090) 2,659
Effects of:
Expenses not deductible for taxation
purposes 143 326
Share based payments (127)
Adjustments to taxation charge
in respect of prior periods 155 12
Effect of change in taxation rate (45) (11)
Total taxation (credit) / expense (2,964) 2,986
------------- -------
A reduction in the UK corporation taxation rate from 21% to 20%
(effective from 1 April 2015) was substantively enacted on 2 July
2013. Further reductions to 19% (effective from 1 April 2017) and
to 18% (effective 1 April 2020) were substantively enacted on 26
October 2015, and an additional reduction to 17% (effective 1 April
2020) was substantively enacted on 6 September 2017. This will
reduce the Group's future current taxation charge accordingly. The
deferred taxation asset at 31 December 2018 has been calculated
based on these rates.
8 Intangible assets
Goodwill Trademark Software Assets under the Commercial Total
course of Agreement
construction
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
Cost
At 1 January
2018 20,758 504 1,717 163 - 23,142
----------------- ----------------- ----------------- ------------------ ------------------ -----------------
Additions 30 - - 855 2,263 3,148
Disposals - - - - - -
Transfer - - 579 (579) - -
At 31 December
2018 20,788 504 2,296 439 2,263 26,290
----------------- ----------------- ----------------- ------------------ ------------------ -----------------
Amortisation
At 1 January
2018 - - 1,094 - - 1,094
----------------- ----------------- ----------------- ------------------ ------------------ -----------------
Charge for the
year 30 - 295 - 75 400
Disposals - - - - - -
At 31 December
2018 30 - 1,389 - 75 1,494
----------------- ----------------- ----------------- ------------------ ------------------ -----------------
NBV at 31
December 2017 20,758 504 623 163 - 22,048
NBV at 31
December 2018 20,758 504 907 439 2,188 24,796
----------------- ----------------- ----------------- ------------------ ------------------ -----------------
The goodwill is allocated to one cash generating unit ("CGU")
being Style Group Holdings Ltd. Management have performed
impairment reviews on the carrying value of the goodwill at 31
December 2018 and 31 December 2017. For the review at 31 December
2018, the recoverable amount of the CGU has been determined from
value in use calculations based on cash flow projections covering a
two year period to 31 December 2020 which is then rolled forward
for 10 years. The assessment was performed on a value in use basis
using a 7% discount rate and the following year's budget as
approved by the Board, followed by a forecast for 2020 used for the
recent refinancing with no further growth into the future. The key
assumptions underpinning these forecasts are based on historical
sales trends and costs adjusted for up to date information,
including pricing changes, product mix and headcount. Management
does not currently believe that any reasonably possible change in
the key assumptions on which assessments of recoverable amounts
have been based would cause the carrying amount of goodwill to
exceed its recoverable amount.
The trademark represents the Safestyle trademark which was
acquired in 2010. The trademark is considered to have an indefinite
useful life because there is no foreseeable limit to the period
over which the asset is expected to generate net cash inflows for
the business. The trademark is not amortised but is tested annually
to determine whether there is any indication of impairment and is
included in the review above.
The Commercial Agreement represents the fair value of the share
consideration that the Group expects to issue under the terms of
the Commercial Agreement as described in the Chairman's statement
for the non-compete services to be received. The Commercial
Agreement is in place for a 5 year period, therefore the cost is
amortised over the 5 year period. Management considered an
alternative accounting treatment allowed under IFRS 2, whereby the
cost of the non-compete agreement would be expensed over the
vesting period of the shares, being 4 years. This would have the
effect of removing the intangible asset of GBP2,188k from the
balance sheet and therefore reduce the risk of future impairment.
Management determined that the most appropriate accounting
treatment was the recognition of an intangible asset.
9 Provisions
Dilapidations Product guarantees Commercial Agreement Total
2018 2017 2018 2017 2018 2017 2018 2017
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
Balance at
beginning
of year - - 2,029 2,396 - - 2,029 2,396
Utilised in
year - - (1,197) (1,180) - - (1,197) (1,180)
Provided in
year 767 - 1,712 813 1,000 - 3,479 813
Balance at
end of
year 767 - 2,544 2,029 1,000 - 4,311 2,029
------------ ------------ --------- --------- ------------ ------------ -------- --------
Current 279 - 844 599 - - 1,123 599
Non current 488 - 1,700 1,430 1,000 - 3,188 1,430
Balance at
end of
year 767 - 2,544 2,029 1,000 - 4,311 2,029
------------ ------------ --------- --------- ------------ ------------ -------- --------
Dilapidations - The Group has a portfolio of leased properties
that sales branches and installation depots operate from.
Historically upon exiting a property lease, the Group has incurred
contractual dilapidations charges from the landlord to cover the
wear and tear repair costs from the Group's tenancy. The
dilapidation provision is estimated on the property size, its use
as either a sales branch or installation depot, and the historical
charges incurred upon exiting similar properties.
Product Guarantee - The Group gives guarantees against all its
products, which in the majority of cases covers a period of 10
years. A product guarantee provision is made for the expected
future costs of rectifying faults arising within the guarantee
period and then discounted at 7% to a net present value.
Commercial Agreement - The provision for the Commercial
Agreement represents the cash consideration that the Group expects
to issue under the terms of the Commercial Agreement as described
in the Chairman's statement. The cash consideration of between
GBPnil and GBP2,000k is payable in October 2020.
10 Share capital
2018 2017
GBP000 GBP000
Authorised
77,777,777 Ordinary Shares @ 1p each 778 778
97,223 Ordinary Shares @ 1p each on 17 July 2015 1 1
2,367,143 Ordinary Shares @ 1p each on 22 October 2015 24 24
2,564,427 Ordinary Shares @ 1p each on 22 April 2016 25 25
177,513 Ordinary Shares @ 1p each on 02 May 2017 2 2
2,201 Ordinary Shares @ 1p each on 09 May 2017 - -
3,302 Ordinary Shares @ 1p each on 01 June 2017 - -
4,128 Ordinary Shares @ 1p each on 01 June 2017 - -
90,000 Ordinary shares @ 1p each cancelled on 03 October 2017 (1) (1)
90,000 Ordinary shares @ 1p each cancelled on 04 October 2017 (1) (1)
15,000 Ordinary shares @ 1p each cancelled on 05 October 2017 - -
10,182 Ordinary Shares @ 1p each on 20 November 2017 - -
828 828
==================== ====================
Allotted, issued and fully paid
77,777,777 Ordinary Shares @ 1p each 778 778
97,223 Ordinary Shares @ 1p each on 17 July 2015 1 1
2,367,143 Ordinary Shares @ 1p each on 22 October 2015 24 24
2,564,427 Ordinary Shares @ 1p each on 22 April 2016 25 25
177,513 Ordinary Shares @ 1p each on 02 May 2017 2 2
2,201 Ordinary Shares @ 1p each on 09 May 2017 - -
3,302 Ordinary Shares @ 1p each on 01 June 2017 - -
4,128 Ordinary Shares @ 1p each on 01 June 2017 - -
90,000 Ordinary shares @ 1p each cancelled on 03 October 2017 (1) (1)
90,000 Ordinary shares @ 1p each cancelled on 04 October 2017 (1) (1)
15,000 Ordinary shares @ 1p each cancelled on 05 October 2017 - -
10,182 Ordinary Shares @ 1p each on 20 November 2017 - -
828 828
==================== ====================
11 Share based payments
At 31 December 2018 the Group had the following share based
payment arrangements:
LTIPS
The Group operates an equity-settled Long Term Incentive Plan
("LTIP") remuneration scheme for Directors and certain management
("LTIP 2016", "LTIP 2017" & "LTIP 2018").
On 18 June 2018, 1,333,333 options were granted ("LTIP 2018").
On 15 August 2018, a further 350,000 options were granted (also
"LTIP 2018"). Finally, on 19 October 2018, a further 1,104,830
options were granted (also "LTIP 2018"). All schemes require a
combination of specific performance based criteria and remaining an
employee for a minimum period.
The numbers of share options in existence during the year were
as follows:
2018 2017
Number Weighted Number Weighted
of share average of share average
options exercise options exercise
price price
------------------------- ---------- ---------- ---------- ----------
Outstanding at start
of period 907,359 GBP1.51 1,030,134 GBP2.18
Granted during the year 2,788,163 - 348,210 -
Issued in the year - - - -
Cancelled in the year - - - -
Lapsed in the year (471,922) GBP0.37 (470,985) GBP1.86
Outstanding at end of
period 3,223,600 GBP0.17 907,359 GBP1.51
Exercisable at end of - - - -
period
--------------------------- ---------- ---------- ---------- ----------
Options are valued using the Black-Scholes option pricing model.
The following information is relevant in the determination of the
fair value of the options granted during the period.
LTIP 2018 LTIP 2017 LTIP 2016
Grant date 19/10/2018 15/08/2018 18/06/2018 10/04/2017 29/04/2016
Vesting date 18/06/2021 18/06/2021 18/06/2021 10/04/2020 29/04/2019
Lapsing date 19/10/2028 15/08/2028 18/06/2028 10/04/2027 01/04/2026
Risk free interest rate 0.85% 0.75% 0.78% 0.15% 1.22%
Expected volatility 60.90% 51.90% 47.10% 33.60% 36.93%
Expected option life (in
years) 2.67 2.84 3.00 3.00 3.00
Weighted average share GBP0.57 GBP0.33 GBP0.56 GBP3.04 GBP2.67
price after adjusting for
PV of dividends
Weighted average exercise GBP0.00 GBP0.00 GBP0.00 GBP0.00 GBP2.68
price
Weighted average fair value
of options granted 56.60p 33.00p 55.90p 256.00p 65.79p
Dividend yield 0.00% 0.00% 0.00% 5.71% 3.60%
Remaining contractual life 9.81 9.63 9.47 8.28 7.25
At the grant date there was limited share price history for the
Group on which to calculate volatility. Volatility was therefore
estimated using both Safestyle and companies classified in the
'Home Improvement Retailers' subsector on the London Stock
Exchange.
SAYE
On 8 May 2018 the Group launched a new share save (SAYE) scheme
("SAYE 2018") in addition to the existing schemes ("SAYE 2016" and
"SAYE 2017") for employees. All schemes allow employees to acquire
a certain number of shares at a discount of 20% of the share price
prior to the invitation to join the scheme, using amounts saved
under a 'Save As You Earn' savings contract.
The "SAYE 2015" vested within the period and no shares have been
issued. The numbers of share options in existence during the year
were as follows:
2018 2017
Number of share Weighted Number of share Weighted
options average options average
exercise exercise
price price
------------------ ------------------- ---------- ------------------- ----------
Outstanding at
start of period 204,125 GBP2.10 423,382 GBP1.49
Granted during
the year 794,139 GBP0.49 128,205 GBP2.40
Issued in the
year - - (197,236) GBP1.30
Lapsed during
the period (194,972) GBP1.92 (150,226) GBP1.68
Outstanding at
end of period 803,292 GBP0.57 204,125 GBP2.10
Exercisable at
end of period - - - -
-------------------- ------------------- ---------- ------------------- ----------
Options are valued using the Black-Scholes option pricing model.
The following information is relevant in the determination of the
fair value of the options granted during the year.
SAYE 2018 SAYE 2017 SAYE 2016
Grant date 08/05/2018 25/04/2017 01/04/2016
Vesting date 01/06/2021 01/06/2020 01/05/2019
Lapsing date 01/12/2021 01/12/2020 01/11/2019
Risk free interest
rate 0.92% 0.21% 0.56%
Expected volatility 48.50% 34.17% 32.88%
Expected option
life (in years) 3.35 3.35 3.35
Weighted average share price after GBP0.59 GBP3.14 GBP2.81
adjusting for PV of dividends
Weighted average GBP0.49 GBP2.51 GBP2.25
exercise price
Weighted average fair value
of options granted 24.70p 68.60p 71.93p
Dividend yield 0.00% 5.53% 3.40%
Remaining contractual
life 2.92 1.92 0.84
At the grant date there was limited share price history for the
Group on which to calculate volatility. Volatility was therefore
estimated using both Safestyle and companies classified in the
'Home Improvement Retailers' subsector on the London Stock
Exchange.
Alan Lovell Options
On 20 December 2018, as described in the statement from the
Chairman of the Remuneration Committee, the Group issued 250,000
options to its Chairman, Alan Lovell. The numbers of share options
in existence during the year were as follows:
2018 2017
Number of Weighted Number of share Weighted
share options average options average
exercise exercise
price price
----------------- ------------------- ---------- ------------------- ----------
Outstanding at
start of period - - - -
Granted during
the year 250,000 - - -
Issued in the
year - - - -
Lapsed during
the period - - - -
Outstanding at
end of period 250,000 - - -
Exercisable at
end of period - - - -
----------------- ------------------- ---------- ------------------- ----------
Options are valued using the Black-Scholes option pricing model.
The following information is relevant in the determination of the
fair value of the options granted during the year.
Alan Lovell Options
Grant date 20/12/2018 20/12/2018
Vesting date 16/07/2021 16/07/2020
Lapsing date 20/12/2028 20/12/2028
Risk free interest
rate 0.73% 0.71%
Expected volatility 63.50% 76.50%
Expected option
life (in years) 2.57 1.57
Weighted average share price after GBP0.86 GBP0.86
adjusting for PV of dividends
Weighted average GBP0.00 GBP0.00
exercise price
Weighted average fair value
of options granted 86.30p 86.30p
Dividend yield 0.00% 0.00%
Remaining contractual
life 9.98 9.98
At the grant date there was limited share price history for the
Group on which to calculate volatility. Volatility was therefore
estimated using both Safestyle and companies classified in the
'Home Improvement Retailers' subsector on the London Stock
Exchange.
The total share-based (credit)/expense comprises:
2018 2017
GBP000 GBP000
Equity settled
- LTIP (2) 351
Equity settled
- SAYE (375) 70
Equity settled - Alan Lovell Options 3 -
(374) 421
------- -------
12 Contingent Liability
During 2017 there was an incident during installation which led
to a reportable injury. The Health & Safety Executive ("HSE")
has carried out an investigation into the case. The HSE has stated
that, at this time, it does not intend to prosecute the Company
following its thorough investigation and consequently, management
has not recognised a provision in these financial statements.
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
FR EADDEAAFNEAF
(END) Dow Jones Newswires
March 21, 2019 03:01 ET (07:01 GMT)
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